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October 29, 2008 2:54AM (UTC)

Of all the the thoughts that crossed my mind during the evening in 1988 when I saw The Sugarcubes and heard Bjork's Icelandic wail for the first time in a Haight-Ashbury club called The I-Beam, not once did I imagine the possibility that 20 years later, I would be reading her thoughts in The Times on a global credit crisis and how it applied to Iceland's environmental movement. But that's why I write this blog: To make outlandish connections across space, time, and Bjork.

If you haven't been following the Icelandic credit freeze saga, the Cliff Notes version is that a handful of entrepreneurs and banks borrowed massive amounts of capital abroad and then got caught in the post-Lehman Bros. bankruptcy global credit crunch. All of Iceland's major banks ended up nationalized, the country has been forced to beg for an emergency loan from the IMF, and the nation of 300,000 is now facing a brutal economic contraction -- unemployment alone is predicted to jump from one to eight percent.

Bjork does not overly trouble herself with the details of credit market shenanigans. Her concern is that the looming recession threatens to trample nascent efforts to ensure that another boom industry in Iceland, aluminum smelting, behaves in an environmentally sustainable fashion. Aluminum smelting is highly energy intensive -- but if there's one thing Iceland's got a lot of , besides cod fisheries, it is energy, from both hydropower and geothermal sources. But even though the power sources are renewable, "new geothermal power plants and the building of dams... would damage pristine wilderness, hot springs and lava fields. To take this much energy from geothermal fields is not sustainable," writes Bjork. (Thanks to FreeExchange for the link.)

A lot of Icelanders are against the building of these smelters. They would rather continue to develop smaller companies that they own themselves and keep the money they earn. Many battles have been fought in Iceland on these issues. One resulted in the Environment Minister insisting for the first time that an environmental impact assessment should be carried out before any smelters or dams were built...

Usually I don't notice politics. I live happily in the land of music-making. But I got caught up in it because politicians seem bent on ruining Iceland's natural environment. And I read last week that, because of the crisis, a number of Icelandic MPs are lobbying for the environmental assessment to be ignored so that the dams can be built as quickly as possible to give Alcoa and Rio Tinto the energy they need for the two new smelters.

Iceland deserves plenty of blame for its wild spending spree and expansion into international banking, but the possibility that environmental protections will be spurned to ward off economic hard times, brought about, in large part, by irresponsible speculators in exotic financial instruments in London and New York, should send a Nordic chill through the bones of environmentalists everywhere.

The renewable energy legislation passed as part of the financial bailout package allows solar companies to take a 30 percent tax credit on the cost of building a power plant. Now most of these companies are startups and have no way to monetize, as they say on the Street and in Silicon Valley, those tax credits as they're not profitable. Instead, a solar company must essentially trade the tax credits to a firm that can use them in exchange for cash to finance construction.

"Tax equity is becoming increasingly hard to raise for renewable energy projects," said Keith Martin, a project finance attorney at the Washington firm Chadbourne & Parke. "Several large institutional investors who put money into renewable energy deals in the last three years have dropped out of the market."

It's not just tax credits for solar power that are affected. Tax credits are used in other sectors -- rehabilitation of historic properties (the federal historic preservation tax credit) and the development of affordable housing (federal low income housing tax credit).

Most affordable housing these days is financed through the use of tax credit partnerships, which have suddenly become significantly less attractive. Large financial institutions, working through tax credit syndicators, are the principal investors in these types of deals. As everyone who hasn't been living in an isolated Icelandic cave for the past year knows, financial institutions don't have much in terms of income in order to warrant investing in tax credits. No need to offset what you're not having to pay. Affordable housing deals have been getting much harder to close. Unfortunately, this comes at a really bad time when the need for affordable housing is at an all-time high.